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SweetVictoryHershey’s holiday sales melted when it switched software in 1999.Now, a second try is succeeding. Here are the lessons learned. BY DAVID F. CARR

supposed to allow Hershey to change and streamline its business processes.

Hershey selected SAP to provide the heart of the system, which would be complemented by planning and transportation management software from Manugistics, and new sales software from Siebel Systems. Siebel doesn’t seem to have had much to do with what went wrong, though by including it Hershey put a third major systems implementation project on its plate.

Hershey wasn’t inexperienced with Manugistics, having used mainframe versions of its software for years, but now it was switching to a client/server version that would be configured as a bolt-on to SAP. Much of the project’s complexity was in the inte-gration of the SAP and Manugistics software, which had to work together to manage orders and schedule

WAS IT A FLUKE? In September, Hershey Foods said it had completed an upgrade to mySAP.com—on scheduleand below budget. �IT WAS A SIGNIFICANT TURNAROUND for a company that had become an example ofhow not to do a major software project. In 1999, Hershey stumbled while rushing to complete an enterprise systems overhaul, with a new SAP implementation at its core. Basic order management and fulfillment processesbroke down, causing the company to fail to meet many retailers’ orders. The immediate impact was about$150 million in lost sales for the year. The damage to sales and retailer confidence lingered into early 2000.

�HERSHEY IS STILL RELUCTANT to discuss what happened and what caused it; the company declinedrepeated requests for interviews from Baseline over the past year, and asked SAP and Accenture (which helpedwith the mySAP implementation) not to talk, either. But we gathered insight from insiders and former employees, and from some public statements Hershey has made about its supply-chain improvements. Here’s a look at three things that went wrong at Hershey—and the subsequent lessons learned.

WHAT WENT WRONG: THE BIG BANGThe overriding problem appears clear: Hershey was simply trying to do too much at once. In cosmology, the Big Bang theory tells us the uni-

verse sprang into being in an instant, wiping out everything that went before. In Hershey’s case, it was the old logistics systems that had allowed it to do business for years that were wiped out in a flash.

In late 1996, Hershey’s management approved what came to be known as the Enterprise 21 project, which would largely replace legacy mainframe systems with new enterprise client/server software. Enterprise 21 was partly a Year 2000 project, allowing Hershey to scrap rather than repair legacy software that might not process date-related procedures correctly after the turn of the century. But the new systems were also

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consolidated the processing of more than 95% of its revenueand business transactions within a single system. Hershey isalso using SAP’s Business Warehouse for analytic applicationsfor marketing and brand managers. Besides upgrading to thelatest SAP software, Hershey said it was able to enhance busi-ness processes central to its order management, such as gen-eration of the “pick lists” used by warehouse workers to pulltogether all the products that make up a shipment to a par-ticular customer.

There’s another Hershey project that shows how its ap-proach to big projects has changed. The opening in 2000 of anew Eastern distribution center, EDC III, was part of an ini-tiative to strengthen the overloaded physical logistics infra-structure that exacerbated the systems problems of 1999, butit also had a systems component. For the first time, Hersheywas dictating the choice of warehouse management software,a decision that previously had been left at the option of thethird-party logistics companies it hired to manage its ware-houses. Hershey picked a solution from RedPrairie (thenknown as McHugh Software).

Speaking at RedPrairie’s user conference earlier this year,Kenneth D. Miesemer, director of Eastern distribution oper-ations at Hershey, made the connection explicit. “Hersheyhad really come out of a bad ERP system implementation, sothis project was very critical,” he said.

This time, Hershey made sure to take the time and re-sources to thoroughly test the computer systems. Testing in-cluded putting bar codes on empty pallets and going throughthe motions of loading them onto trucks so that any kinkswould be worked out before the distribution center openedfor business. “If we had any problems, we wanted to keep it outof the press,” Miesemer said.

WHAT WENT WRONG: UNENTERED DATAHow could Hershey lose track of inventory so badly that it couldn’t fill orders in 1999? That’s one part of the story that’s never been explained

well publicly.“The project really failed on a very simple thing,

which is the recognition that SAP requires a lot of discipline,” says Penn State’s Stenger. “SAP needs to know where all the inventory is.” Specifically, the problem was that Hershey had devised informal mechanisms for dealing with the tremendous buildup of inventory to prepare for the holiday rush. “Hershey had always over the years been very good at crisis management, and they would put candy everywhere they could to store it in anticipation of this peak season. They weren’t used to having to tell the computer about that,” Stenger says.

This “surge storage” capacity included warehouse space rented on a temporary basis, and sometimes even spare rooms within factory buildings. The problem was that these locations hadn’t been recorded as storage points in the SAP data model. Before SAP fulfills a customer order, it first checks its records of available inventory, and in this case a significant amount of inventory was not where the official records said it was.

Whether the fault for this oversight lay with

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shipments to customers.Indeed, Alan Stenger, a professor at Penn State’s

Center for Supply Chain Research who has studied the 1999 mishap, says some Hershey executives wanted to supplement principal integrator IBM Global Services with another consulting firm that had more experi-ence with the SAP-Manugistics interface. Hershey’s management chose not to take that step.

Although the plan had been to switch on the new systems in April—an off-peak time for candy orders—the project ran behind schedule and wasn’t completed until July. With Halloween orders already starting to roll in and the immovable Y2K deadline looming, Hershey decided in favor of a direct cut-over strategy in which all the new software would be turned on at once; it rejected another strategy in which the system would have been phased in one module at a time. The problems caused by this abrupt transition weren’t immediately apparent, but essentially orders began falling through the cracks. Despite having plenty of inventory on hand, Hershey couldn’t get it to customers.

By September 1999, in any event, it was too late for Hershey to backpedal. It had essentially demolished its old logistics systems to make way for the new one, and workers spent the next few months going through contortions to work around the problems and ship candy despite the system, rather than through it.

LESSON LEARNED: GO SLOWLYTo be fair, in 1999 Hershey was rushing to meet an immov-able deadline, since it was trying to get off legacy systemsthat might not continue to work correctly as of Jan. 1, 2000.Still, Hershey has demonstrated success in the years sincewith a less-hurried, methodical approach that leaves timefor testing.

After stabilizing SAP and the attendant systems, Hersheyfound itself with something that was merely acceptable. So af-ter a careful redesign, it began work on the upgrade to mySAPin July 2001. The work was completed in 11 months, 20% un-der budget, and without disruption to customers, according toHershey and its partners. With this release, Hershey says it has

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HERSHEY FOODS INC. BASE CASEHeadquarters: 100 Crystal A Drive, Hershey, PA 17033Phone: (717) 534-6799Business: The leading chocolate maker and manufacturer of otherconfections.Chief Information Officer: George DavisFinancials in 2001: $4.6 billion in revenue, $207 million in net incomeChallenge: Restore confidence in distribution systems following a1999 breakdown in Halloween orders, while extracting additional efficiencies from supply chainBASELINE GOALS:

�Maintain sales growth of at least 3% to 4% per year, outpacinggrowth in the confectionary industry

�Save $75 million to $85 million by the end of 2002 through restructuring initiatives, including closing of older distribution centers

�Use supply-chain efficiencies to help increase gross margin above the 41.5% level achieved in 2001

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logistics managers for failing to provide this data or with the information technology experts for failing to identify it as a requirement, “somewhere there was a breakdown between the technical people and the logistics people,” Stenger says.

LESSON LEARNED: DATA IS KING“We’d had a real problem with inventory accuracy, and a lot ofthe time we didn’t have the right inventory to the right placeaccording to our records,” Hershey’s Miesemer acknowledgedin his speech at the warehouse management conference.Fixing those problems became one of his priorities.

Steve Sawyer, Penn State information sciences and tech-nology professor, sees this as a typical example of the datamanagement problems that occur in many enterprise systemsimplementations. “ERP systems require an overarching datamodel, and typically the experts within the information tech-nology department are database administrators who are usedto dealing with individual projects,” he says. Often, depart-ments fail to communicate about their data requirements ex-cept in an ad hoc way, meaning that problems are notidentified until after implementation of a new system.

WHAT WENT WRONG: NO LEADERSHIPBefore Hershey hired CIO George Davis, a former Computer Sciences Corp. consultant, the highest ranking information technology executive at the

company was a vice president a couple of levels down. Yet the people involved say the lack of a CIO wasn’t necessarily the issue in 1999 so much as a lack of management understanding of how much effort, both in systems development and organizational change, would be required for success.

Penn State’s Sawyer believes many of the pitfalls of enterprise systems implementation revolve around governance issues. At Hershey, he suspects that business and technology managers aligned with different parts of the business were pulling in differ-ent directions, and no one at the top pulled these demands together to guide the creation of a system that would work for the whole business. That’s very typical, Sawyer says: “You get 100 little committees, with no oversight.”

Often, the people within the company charged with project management are so overwhelmed by the number of details that must be addressed that they wind up leaving the definition of basic business processes to consultants who lack the necessary inside knowledge of their business, Sawyer says.

LESSON LEARNED: OVERSIGHT MATTERSIf Hershey didn’t understand the importance of systems proj-ect oversight before Halloween 1999, it certainly did afterward.In the distribution center modernization, because top man-agement was determined that nothing go wrong, “we wound upwith a very high-powered steering committee,” Miesemer saidin his speech. “We had the CEO himself involved.”

By all accounts, Hershey has put significantly more em-phasis on close executive oversight of systems projects eversince. And it’s for that reason that Sawyer suspects thatHershey may have benefited, in a perverse way, from its suf-fering. Many enterprise systems can use a fundamental re-design after their initial implementation, and they don’t oftenget that opportunity, he says. “In other words, most corpora-tions don’t fail so dramatically the first time, so their repair isnever so good.” �

�Hershey’s plannedoverhaul of its enterprise systems,replacing legacy systems with packagedsoftware, begins.The “Enterprise 21”project (based on software from SAP,Manugistics and Siebel)aims to eliminate Y2Kworries and makeHershey more efficient.

SOURCE: HERSHEY FOODS, BASELINE

�Hershey attributesnew efficiency gainspartly to full implementation of its core enterprise systems—as well as supply-chain improvements.

�Company begins theprocess of upgrading tomySAP.

97 98 99 00 01

$4.6B

�Hershey begins moving toward a company-wide supplychain strategy,establishing a single organization for supplyand distribution logistics. As plans shapeup for a new distributioncenter, Hershey muddlesthrough the holidayswith temporary facilitiesfor overflow inventory.

ACTUAL SALES AND BASELINETHIS PERIOD REFLECT DIVESTITUREOF A $344M PASTA BUSINESS.

$3.9B

Even with the technology-related disappointment of 1999, Hershey’s sales since 1997 have,on average, met the company’s goal of growing at least 3% annually.

�Hershey begins to regain the confidence of retailers with its performance during theEaster season and getsthrough Halloween without another embarrassment. It alsobegins to implement anew warehouse-management system.

�After investing$112 million in its new system, Hershey turns iton just as Halloweencandy orders start to rollin. The move backfireswhen a breakdown inthe order-managementprocess preventsHershey from gettingits products to market,costing Hershey$150 million in sales.

DIP AND RECOVERY: TECHNOLOGY’S IMPACT AT HERSHEY FOODS

$4.3B

$4.3B

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BASELINE3% annual growth

HERSHEY’S ACTUAL SALES

$4.48B

$4.56B